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New tax scheme to kick-start regeneration
13 July 2009
Local authorities struggling to fund regeneration may be able to
kick-start projects through a new scheme based on lending secured
against predicted increases in tax revenue. The scheme, known as
Tax Increment Financing (TIF), would allow councils to borrow money
from private sector investors and secure the loans against the
expected increase in business rates generated by improving the
local area.
Why do we need a new way to fund projects?
Constraints on public spending due to the recession and the
downturn in the property market have significantly reduced the
amount of money available for regeneration. Local councils are
shelving projects and traditional funding sources are no longer
readily available. MPs on the all-party Urban Development Group
have therefore recommended the TIF scheme as a way to ensure that
redevelopments can still go ahead.
How will the new TIF scheme help?
Tax Increment Financing allows local authorities to grant
‘bonds’ to private investors which are secured against anticipated
increases in business rates tax revenue as a way to secure
investment in public projects. This avoids the need for councils
themselves to find the money upfront to fund regeneration.
Revenue from business rates tends to increase as a result of
redevelopments. This is because housing developments and urban
renewal make the local area more attractive, leading to an increase
in the rateable value of commercial property. The extra tax
generated is the ‘tax increment’ and is used to pay back loans from
investors. Currently, business rates are paid direct to the
Treasury, but under the TIF scheme the additional tax revenue from
designated local areas would be ring-fenced and paid back to
investors. The interest on loans paid to investors is likely to be
tax exempt.
What are the advantages?
Local councils favour TIF schemes because they make projects
possible which would otherwise have stalled due to lack of public
funding. TIF promotes regeneration without councils having to fork
out upfront, and money can be raised without having to use general
revenues, capital reserves or funding from central government with
conditions attached.
Private sector partners are also more likely to invest in TIF
projects because they can secure their investment against tax
recouped and claim a tax exemption on loan interest. Local
residents are likely to see a rise in the value of their properties
after redevelopment and local businesses will benefit from
increased trade as more people move into the area.
What are the disadvantages?
TIFs are not without their risks. If the predicted additional
tax revenue is not as high as expected, investors will not be able
to recover the full amount of the loan they made. It may also take
up to 25 years for enough tax to be generated to pay off loans.
There is also concern that TIF schemes may be used for areas
where redevelopment would happen anyway, such as those on the edge
of central business districts. This would mean that the extra tax
generated is used up paying off loans, rather than being available
as revenue.
The TIF method has also been accused of encouraging favouritism
for politically connected developers and other associated parties
whom some people believe are more likely to be granted bonds by
local councils.
What else is in the pipeline?
The new Business Rates Supplement Act passed earlier this month
has given local authorities the power to levy higher business rates
on certain properties to raise money for public projects. Under the
Act, councils can charge up to 2p more per £1 of business rates to
pay for new housing and infrastructure schemes. The levy would
apply to commercial property with a rateable value of over £50,000
and local business would be able to vote on whether or not to
accept the proposed supplements. The CBI says that the right to
vote is important to ensure that the extra tax is applied to
projects that are economically sound. The London Crossrail is one
project that will be funded by supplemental business rates, but
businesses will not be allowed a vote on this scheme.
Conclusion
The TIF scheme has its advantages and disadvantages. However, in
a recession it is vital that regeneration continues and new funding
streams are found. The parliamentary Urban Development Group wants
the Government to pilot the new TIF programme in England in up to
six local authority areas, with a view to introducing a national
scheme in 2011. Local councils across the UK, including Birmingham,
Leeds and Manchester, recently submitted proposals for TIF schemes
to the Treasury. Wandsworth Borough Council has also requested a
TIF scheme to develop Battersea Power Station. The Chancellor is
expected to announce which programmes will get the go-ahead in the
pre-budget report in November.
talk to us
Dominic Swift
0161 242 1303
Partner and Head of Public sector and Property
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